issue. >> yes or no. >> c-span programs are available at c-span.org, on our web page, and by searching the video library. the washington international trade association hosted a discussion on trade deficits and whether they are good or bad for the u.s. economy. robert shapiro, former under secretary of economic affairs at the commerce department during the clinton administration was among the experts on the panel. good morning, everyone. thank you for joining us. my name is ken levinson, i'm the executive director of the washington international trade association. we are delighted so many of you braved the elements to be here today, and welcome to our friends watching on cspan. today's event follows events on the current trade agenda. we addressed the border adjustment tax, naft that, trade

with china, all those events, videos from all those events, are available on our website. americastradepolicy.com. all of our content, as well, including our work on the next gen trade initiative, where we are looking at the future of trade and hosting a series of events looking at things like 3d printing and the impact those have on trade. we couldn't have timed it too much better. last night the president was tweeting about trade deficits. today he'll be issuing an executive order on trade enforcement and trade deficit. as you know, the mission is to educate about trade policy. we couldn't be more happy than to have today's panel. moderated by my old friend, ambassador peter allgeler. after the remarks, we'll have a discussion among the panelists and open it up for questions. with that, peter. >> thank you very much. thank you all who successfully

braved the rain today. obviously we have a very timely discussion topic today. really it is at the very heart of the debate about u.s. trade policy. we are very fortunate to have three recognized experts in trade policy, economic policy. to my left here is rob shapiro. they specialize in economic risks and economic policy. he is also at the georgetown university school of business and previously served among other things as secretary of commerce for economic affairs. she has previous experience with the imf and she also has a phd in economics from columbia. from the far left in terms of the seating is peter who is at the smith school of business. you hear about the smith effect.

i don't know if he will reveal the smith effect today or not but we'll find out. he was director of economics at the international trade commission. he also has a phd from the state university of new york at albany. let's start by defining what we are talking about. so there are two parts to the trade balance. there is merchandise trade,

manufacturers and raw materials and there is services trade. things like financial services, express delivery, computer-related services, entertainment services, and so forth. now last year our u.s. ran a merchandise trade deficit of approximately $750 billion. but a services trade surplus of about $250 billion. so basically we had a trade deficit of $500 billion. now, that trade deficit was not the largest on record. if you look over the period 2000 to 2016 we had six years in which merchandise trade deficit was higher than last year. we had ten years in which it was lower. we had merchandise trade deficits continuously since 1976.

the services trade surplus last year was also not a record. it was the third highest surplus that we have had in services. we have had a services trade surplus continuously since 1971. now, i think in the current political discussion when people are talking about trade deficits implicitly they are talking about the merchandise trade deficit. just fyi, our largest merchandise trade deficits in 2016 were with china, japan, mexico, vietnam and italy. if you want to do something on on the trade deficit, cut back on your pasta intake. i think that's an easy one. our largest export markets were canada, mexico, china, japan, uk, germany, and korea. so they are also our largest

merchandise trade deficits are also countries that are largest merchandise export markets. okay. so the current debate about trade deficits has been framed by the trump administration by their assertion that trade deficits are very important and damaging to the u.s. economy because they indicate jobs that had been lost to overseas countries, foreign countries largely because of unfair trade practices. we want to look at the issue of the trade deficit and how it relates to trade policy and how it also may relate to other factors. as our speakers present their initial comments i would ask them to consider three questions. one, what are the principal reasons for the trade deficit

both overall and bilaterally. second, how worried should we be about the continuing merchandise trade deficit or about the current size. and then third, what, if anything, should the u.s. do about its trade deficit? so i've asked caroline freund to go first, so caroline, the mike is yours. thank you. >> thank you. it's a pleasure to be here. i was actually planning to walk down here from the peterson institute and pick up a coffee at starbucks on the way. instead i had coffee here. one could say my bilateral deficit with starbucks has improved a little it bit. it would have gotten worse if i bought my coffee, but i came here and had one. although because of the rain, i took an uber here, so my bilateral deficit with uber has expanded. i am not worried about either of

these because i have a surplus with my employer. they keep paying me for my services, so at this point in my life i'm saving, so i'm not really worried about these. and this relates to the points that i'm going to make today. so i'm really just going to focus on two things. one, that it's the aggregate trade balance we should be worried about, but unlike the fiscal balance which is all about fiscal policy, the trade balance actually has almost nothing to do with trade policy. in fact, the trade balance has more to do with fiscal policy than with trade policy. so that's one point i'm going to make. trade balance is not about trade policy. it has me really concerned when i saw the points in the list they will be looking into for what we should be doing about the trade deficit. what was it? it was product by product, country by country, this is the

wrong approach. on trade deficit it's not about those things, and that's not really a good way to go about looking at it. the other point i will make is bilateral trade deaf sits don't matter. this is like my deficit with starbucks, which i'm not particularly worried about, i'm going to emphasize that bilateral deficits don't matter. let's go back and think about what the aggregate trade balance is. it means we import more than we export. how can we do that? how can we buy more from the rest of the world than we sell to the rest of the world? why would they let us do that? only one reason. we are borrowing. so this is why i'm saying it has much more to do with borrowing and lending, with saving and investment, with spending and output than it has to do with trade policy. by definition we must be spending more than we are producing if we are running

trade deficits. as it was stated the trade deficit is currently $500 billion or about 3% of gdp. what are the causes of this? we are borrowing, so one of the causes is fiscal policy because we have been running a fiscal deficit. this why i'm saying if you're concerned about the trade balance it's important not to expand the fiscal deficit because then the government will be absorbing more. it has to come from somewhere. we are borrowing. some of that will come and expand the trade deficit. so fiscal policy is actually super important for the trade balance. what's happened over time that caused this trade deficit to rise? some blame china.

if you look at consumption, consumption to gdp has increased dramatically from about 62% to 68% now. so people are simply consuming more. kind of a good thing we're having a consumption boom, but that's the reason we are running a trade imbalance. savings has gone down and consumption has gone up. we are absorbing more than we are producing. that's the reason we are running a trade deficit with the rest of the world. i will say it has something to do with the exchange rate as well. because the exchange rate, the real exchange rate is the price of our goods for other goods. and because the dollar is the world's currency there have been periods where the dollar has been over valued and in the past there has been some currency manipulation and that means that

our exports are more expensive to the rest of the world and imports are cheaper. that can contribute as well. what's really missing from this list is trade policy. increasing a tariff isn't going to effect the trade balance unless it some how affects savings or investment. unless it's a really high tariff across all partners it won't affect savings and investment and even if it did we don't know the direction it would take because it could reduce both. it could increase both. it could have very different effects. so we don't know what's going to happen to the trade balance using trade policy. so the right tool isn't about trade policy, it's about savings or investment.

the problems with the trade balance are that it's a drag on growth. this is especially a problem when we are growing slowly or the rest of the world is also growing slowly. some of our growth is being exported. since trade is heavy in manufacturers it is true it contributes though the bigger culprits are of course technology and automation and manufacturing as a share of employment has been in pretty constant decline since the 1960s. there's no sudden change in that series if you look at it. as i said, there's also some benefits. we get all these cheap goods, we have our consumption boom. in addition to finance this deficit we have a lot of foreign investment and that foreign investment is good for the u.s. foreign firms tend to have

higher r and d than research and development than the average u.s. firm, and they pay higher wages, as well. that foreign investment is good for u.s. growth and jobs. the real concern isn't the deficit, it's the sustainability. over time that, remember, we are borrowing. so every year we are borrowing from abroad, and that's adding up. so if every year i was buying more than i was earning, i would be accumulating debt. at some point no one will want going to want to lend to me. that's concern with running deficits year after year after year and right now the net external investment position is 45% of gdp in the u.s.

we owe $8 trillion in net external debt. that's the highest of any country in the world ever. it's a big number. as a ratio we are also a big country, 45% of gdp. it's not so bad. my colleagues have a book coming out in the next month on currency conflict and they note that it's around 60% of gdp where countries start having problems, countries like greece, portugal or spain had passed that limit when they ran into problems. so we have some time before we get there but the real concern is sustainability. it's growing this debt over time. it's not about -- it's not about trade per se. so let me just say a few words about the bilateral deficits. some countries have things we need and like. just like starbucks has coffee that i like.

saudi arabia has oil. we are going to have a trade deficit with saudi arabia. supply chains are another reason that we have deficits. we have a great supply chain with mexico where they have parts or components for things we need or assemble products from our high-skilled parts and components, and that makes our companies more efficient in the whole world because of these supply chains. you know what, germany has a huge trade surplus. but they have trade deficits with their low-cost suppliers like czech republic and hungary and so forth and really big ones in the auto sector that their car companies benefit from cheap imports from those countries, just as we benefit from cheap parts from mexico. just to wrap up, what should we do? one, as i said, the fiscal deficit is a problem.

if we are really worried about accumulating debt over time we need to rein that in, or at least limit it. save more. there are things we can do to save more. oddly, the brady/ryan tax plan, it's not the border adjustment tax that would help us rein in the trade deficit. that actually has lots of problems, but switching to a consumption tax might help, because that encourages saving. switching from debt finance to equity might. there are features that might help rein in the trade deficit, but it really doesn't come from anything about a border adjustment tax. the exchange rate, there are things we can do with the exchange rate. one proposal by john williamson and also emphasized by joe and fred as i mentioned before, is

to allow intervention in the currency market to narrow imbalances. so like what china is doing right now, they are actually supporting their currency while they are running a trade surplus. that's okay. what we don't want to see countries doing is intervening to weaken their currency and running a really big circle. that's not okay. that's another kind of agreement you can imagine. and then, you know, with the bilateral deficits, they are mostly political. we talk to countries one on one. you hear about u.s.-china relations, u.s.-mexico, so you think we should think about deficits that way. as i mentioned, it's the wrong approach. it's just some countries have things we need. we should be focused on the aggregate trade deficit if we are worried at all, but trade policy is not the answer, and

i'll stop there, thanks. thank you very much, caroline. peter, will you pick up now? >> this may be the only time any of you get to see me on the left. did you plan this, peter? i thought so. >> i thought you would enjoy being there for a change. >> reminds me of that evening i had dinner with the afl-cia. in any case, i guess my views are very different than the previous speaker. it's an accounting identity that the trade deficit equals the savings deficit. one can say well, we have a trade deficit because we have a savings deficit. i could run causality in the other direction. if i want today debunk the trump administration that's what i would do.

many wondering how is it brexit happened or trump happened. never endorsed donald trump. i want to be clear about that. i'm not here to defend his policies. i could structure an argument that would make it that work and you just heard it. if i was worried about economics profession being debunked, i would certainly make that argument. but to focus on my argument, it's also, you know, by the way true that the current account deficit, which is the trade deficit, has to equal net capital influx, and i could say because we have a current account deficit, therefore we have capital inflows or i could do the reverse and build an argument in either direction and use perfectly reasonable sounding economics to accomplish that. in my mind the trade deficit is the result of a combination of the technological forces driving globalization on the one hand and nationalism on the other.

we have a rules based system which i admire and feel sorely threatened. international trade law -- and i have written about this, and i read books other than those published at my university, is remarkable in that it is the most economically informed aspect of law along with anti trust. it is almost as if the economists were sitting at the feet of the gods being the lawyers that write these documents. and it's conceived from the notion that it brings together groups of market economies for the purposes of trading comparative advantage. things like exchange rates will adjust to ensure that the

outcomes when we teach comparative will indeed happen, that trade will be balanced, that employment will be full, that most importantly that adjustment takes place. when you remove trade barriers workers effectively move from one kind of employment to another maybe with some disruption and requiring some assistance but they are not permanently displaced from the labor force. in reality we have to recognize a couple of things. one is that most of our trade deficit is with china, 60%. of the balance germany is important and japan has been important and continues to be. if you solve the trade deficit you probably have solved the problem. to move away from that for a moment, if you have a system that's based on the notion that

markets will prevail and that trade will balance out then when you have three of the four largest economies, which constitute more than half of trade operating on the basis that it is a matter of public policy that we should run a trade surplus, that exchange rates should be manipulated to that effect. there are a variety of ways to cause an exchange rate to be under valued then the system can't work. so we have to look at trade policy among other things to determine why we have a trade deficit. not just our trade policy, but theirs. it requires fundamentally an open mind about these issues. it causes us to think in ways that are contrary to what we have put up on black boards.

i like to tell my colleagues it is where children learn about markets. it is a beginning but it's not an end. it is in the violation of the real world and whether they have consequence. all of our models have violation in the real world. now, in our case we have had a profound failure to adjust. we have had people who have left the labor force completely for no apparent reason other than they feel discouraged. we have 7 million men between the ages of 25 and 55 unemployed and not looking for work. alongside of that part of our fiscal deficit finances a program that can imply effective marginal tax rate. after all, with obamacare in

place, with food stamps modified as it has been a healthy male 25 years of age sitting at home watching espn is eligible for free health care and food stamps and can, therefore, sponge off his girlfriend and never have to look for work. it is reminder of some of the northern european countries permitted to go to school forever and getting a stipend to do it. of course, that's gone now. we need to talk about aggregates. we need to talk about specific policies that have effect on behavior. so i am saying that the trade policies have something to do with this deficit and the way we spend our money. that said, the consequences for the trade deficit are profound. the amount is great. i think looking at some magical number is silly simply because we will probably pierce through 60%.

the melt down will not happen the way it did in greece because greece can't print money. our meltdown will come that not private actors but central banks don't want to hold it because they hold a great deal of it. when the american public doesn't want to hold it. that's when we'll have a problem. we will never have the problem of not being able to come up with currency to pay for it. we can always print it. it will be an issue of when do people demand such high interest

rates that it makes our federal budget, you know, unsustainable. it throws us into a black hole of a kind we have never seen. we have never seen the principal reserve. we don't know what it looks like. when was the last time we had a financial crisis like 2008? one must have observations to draw generalizations. i would suggest to you we have no counter intuitive here. we have no other examples. we don't know what it's really going to look like. we know probably it will not be nice, that it will take a long time to recover. the immediate effect of people not working is to have a lower gdp. i find it absolutely absurd that we shouldn't expect if we resolved our trade deficit not to have more manufacturing jobs. well, we know in manufacturing and import industries that workers are more productive than they are in domestic disputes. this is an observation in other

economies. we would have more aggregate demand. more would stop watching espn and go to work. how many would deal with how we dealt with social programs? it takes a powerful incentive to get one of these guys off the couch. shifting employment would raise gdp and most of the manufacturing, a good deal is done by manufacturing activities. now, i would point out that a lot of it has followed american manufacturing abroad in response to trade barriers. for example, consider the situation in china. a good way is to promise to move more activity over there. it just happened with apple.

to not enforce foreign corrupt practices. i would be very eager if i could actually get the justice department to do what i wanted to be at least investigating the e-mails on that. the people that get people like general motors in trouble is somebody getting passed up and so on and so forth. now, how do we get out of this mess? we have been growing at 2% a year. to say it's due to productivity growth is to not ask the basic question. does it having something to do with trade deficit? i think it does have something to do with it.

i think it does. i find it ridiculous when i hear arguments from northwestern that say all of the good stuff has been invented. then what would you rather have, this, you know, or a flushed toilet. i'm old enough to have used an out house. i can use an out house to keep this. this makes me so much more productive and provides me with so much more freedom of movement

during the day. i don't have to be near a telephone all of the time and so on and so forth. that's what my life was like. i work at a mega institution which means i work alone. i was always telling people where they could find me. this time a grand bargain on exchange rates would have to include china. china is not going to play by the rules on this sort of thing. i don't think a grand bargain is possible. that would help us get out of this mess. so it does come back to what trump talked about during the campaign. i would also point out that romney talked about the very same things when he was

campaigning, but didn't attract quite the same ridicule. let's face it, donald was kind of a hard guy to like. he is not very politically correct. there is something else going on. we are now at a moment in time where people say that universities have become in closed spaces with closed minds. the economics profession is not even willing to cast doubt on what they have been prescribing for the last 50 years because of events like brexit and trump. they don't want to open their mines. to me it is the greatest barrier to finding a solution. we are going to have to deal

with china very different ways than say please sign this agreement and comply by these rules because it simply won't happen. thank you. >> thank you, peter. i must admit, i never expected we would be talking about the relationship between out houses and productivity and i don't quite understand the connection with the trade deficit. i'm sure we'll get to that here. no. no. okay. rob. >> thank you very much. thank you to wita and my good and old friend kim leavenson for inviting me. do trade deficits matter? that's easy. the answer is yes and no. what's harder is the precise ways extent and conditions under which trade deficits do and do not matter. let me expose two of peter's -- trade deficit is not about poor people and whether we provide health care. let me also say that we have had

about 20 financial crises since 1975. yes, we have a rich data set to understand how advanced economies respond to financial crises, to defend larry, who is an old classmate of mine. a trade deficit or surplus is simple. here we should focus on the underlying policies. for example a trade deficit can be a symptom of of quite positive. similarly it allows us to consume more than we produce including more investment. when it happens with full employment and strong productivity arising trade imbalance presents no downside. that was my regular narrative when i used to announce the monthly trade figures which is

to say the monthly trade deaf it figures in the midst of the longest boom in american history when i was under secretary of commerce. under other conditions arising trade deficit signals negative development. it may signal the companies are falling behind their foreign counter parts. more commonly the negative effects arise by financing. we have to pay for our imparts. when we import more than we export we have to pay the net difference. it leaves foreign companies with dollars they can only spend here. they can use them to buy stocks, real estate and other financial aspects. the negative here is those foreign investors take home the

capital gains they earn from their investments here. more immediately, however, those foreign purchases also increase our supply of capital, which in turn tends to lower or interest rate. as an economic matter the capitol flows indicates in jobs. certainly it would be better to finance those additional investments. we would be worse off if they didn't happen at all. an untutored president slapped tariffs on those with trade surplus with us. it usually focuses on jobs, not

on growth and investment. trade certainly cost some jobs especially jobs between economically desperate companies. it is opposed to trade deficits or surpluses between the united states and other advanced countries. jobs are lost at companies that are least competitive with foreign producers. usually in industries that can operate in other countries that significantly less cost than our companies at that industry. that's why it happens in trade between disparate types of economies. that's what offshoring is all about. when they announced trade deficits we should remember more than half of u.s. imports are what are called related party imports.

that's when a company here imports parts or goods from its own foreign subsidiary. it is a transfer within the country. it is half of our imports. it is also 30% of our experts. they involve transfers in the other direction between u.s. and foreign parent companies here. trade also creates jobs that operate here at less cost or higher quality than elsewhere. so trade moves jobs here as well as investment. from industries that are not competitive to those where we are cost competitive like advanced manufacturing and many services. inevitably, these developments cost some americans their jobs, and we should help them with much greater access to the means to retrain and, if necessary, relocate. we can do that without undermining our strength as the world's most open economy.

let's briefly consider how many manufacturing jobs have been lost to the scale of manufacturing jobs lost to global trade. one found our trade imball lapse with china from 1991 to 2011 cost 2 million jobs, including 1 million in manufacturing. today 12.4 million americans are employed in manufacturing. that's 10% of all private employees. so add another million and the percentage rises to 10.8%. from 10% to 10.8%. now compare that to the 1960s when 25% of employees worked in manufacturing or the '70s when they made up 20% of workers. this signals that trade deficits have had very little to do with most of the decline in u.s. manufacturing jobs, since manufacturing's large decline in a share of employment in the

1960s and early '70s happen while we were running trade purr pluses, not trade deficits. similarly, there's no direct relationship between trade deficits and peoples incomes or living standards. from 1965 to 2000 manufacturing share of gdp fell from 25% to 15%. it's now about 12%. while real per capita income nearly doubled from 22,800 to 43,900. rising living standards depend on rising productivity, which in turn depends on innovation, worker skills, and capital investment. trade deficits had no adverse effect on these dynamics. in fact, trade generally promotes higher productivity and living standards in at least three ways. first, it shifts capital and jobs from less productive to more productive uses. second, it provides access to

the best ideas developed abroad, which we can use and sometimes improve on. you know, the iphone that peter held up is an example of an industry where the u.s. is now a world leader. well, we didn't develop -- we didn't invent the cell phone. the commercial cell phone. the fins did. and we took their ideas and we improved them. that's because we have an open global economy. and lastly, trade puts competitive pressures on u.s. companies to innovate and become more efficient. i want to close for a minute by thinking about trade deficits in a more general way. and this will repeat some of what caroline said, but economists always have to say it four or five times before anyone will listen. in the broadest sense, the trade deficit is determined by how much we consume versus how much we produce, when how much we

consume is determined by how much we save. so a country's trade deficit arises from that country's own saving, investment, and consumption behavior and not from the subsidy or tariff policies or currency policies of other countries. those policies do affect how our trade deficit is distributed across both countries and industries, especially policies that involve currencies and exchange rates. since countries trade in both their own and everyone else's currencies, policies that affect the relative value of those currencies, that is their exchange rates, matter. it's sometimes said that our trade deficit reflects in large part china's program to keep its currency undervalued relative to the dollar. china's program may well affect the u.s.-china bilateral trade deficit, but china's currency policies have little, if any impact on the saving, investment, and consumption

behavior of americans and that's what determines our trade deficit. in any case, we saw that two decades of currency manipulation by china had only a marginal affect, even on the share of manufacturing jobs in our economy. in the end, my best council is to remember one thing, trade is not an adversarial phenomenon. it involves voluntary exchanges. no one forces anyone to trade with anyone. people trade and it only occurs with both sides benefit. so let it happen. >> thank you very much to our panel. we'll open it up for questions in a little bit. i'd like to continue the discussion among the panelists. you know, for most people, getting lost in the details of the balance of payment statements isn't what they're worried about.

what they want to know is do trade deficits go with less employment and less economic growth in the united states? so i mean, rob, you had said when you were undersecretary and putting out the monthly trade deficit figures, it was in the midst of an economic boom. what does economic research and history tell us about relationship between trade deficits and economic growth or trade deficits and overall employment? anybody who wants to. >> i was going to say that recently i tweeted a picture of u.s. growth and u.s. trade deficits. and the correlation is close to zero. and not significant. and exactly for the reason that was stated, that in really good times, you have high demand and you might import a lot. you might even be importing

intermediates to go into your production to help you be more efficient. so during good times you actually tend to run trade deficits and they help to slow your growth so you don't overheat. but during bad times when you're running trade deficits, there may be some cost. we do need to recognize that. it is a drag on growth. but over the long history, there is no correlation between growth and the trade deficit. >> let's just think about our own lifetimes, or the lifetimes of the older ones in this room, like me. you know, we had the lowest unemployment and the strongest growth in the last 60 years, in the 1960s and 1990s. in the 1960s we were running trade surpluses. in the 1990s, we were running trade deficits, which just is an illustration of caroline's point.

it's not to say that there aren't elements underlying trade deficits or surpluses that affect growth. of course there are. but they work in both directions. as i pointed out, for example, the trade deficit increases the supply of capital in the united states, which in turn lowers or interest rate, which in turn tends to increase growth. we know there are some negative affects on growth. there are also positive. in economics almost all phenomenon work in both directions. >> i think that the notion that we've had a lot of growth with trade deficits and poor growth with trade deficits and the reverse and so on and so forth, only illustrates my original argument that we have a lot of identities and it's easy to grab

an identity and then draw an arrow in one direction or another. with regard to the most recent trade deficits, i think we have to look at how markets function and how political entities have responded to those markets. in recent years, with china's entry into the wto, and increased imports from china, people have been displaced. i don't think anybody can deny that people have lost jobs because of increased imports. the question is what happens to them. many have dropped out of the labor force. or their successors, their children who would have taken those jobs, have not participated in the labor force or to the same degree. that's a labor market adjustment problem. now, we also have to consider how government entities have responded. there's been a substantial increase in the safety net to assist those people.

and although the government has tried its hands at training them, it hasn't been very successful. so if we have a situation where we have more imports, people lose their jobs, but they don't adjust, you are going to reduce the gross national product and you are going to reduce growth. i didn't shake my head while you were speaking, i was kind enough not to do that. thank you. i understand it's hard to have an open mind about this. it's very difficult for me, when you realize that i wrote a book called "making free trade work for the council on foreign relations" and it's how i became a tenured professor, but i have to recognize that some of these things haven't worked out as they should. and if i was sitting on a panel with trumpsters, i would be taking a very different approach. for example, it doesn't warm the cockles of my heart they're taking aim at mexico.

in my view, the trade deficit with mexico has a lot to do with the mexicans doing smart things. for example, they have developed a network of trade agreements with other major trading partners such as the europeans, which permit them to be a very effective hub for manufacturing automobiles. for example, to be exported to all ports of the world without duties. our problem with mexico has been that they've been smarter than us about exploiting free trade in the ways the textbooks say they should. our problems with china are the reverse. it's very easy to say in a world where you work on a black board and there are end countries with end factors and no one is very large, no one can influence prices by themselves, that the trade deficit with one country doesn't matter. or their industrial policies don't matter. and to say that, you know, the

process will raise incomes. there's a reason that elections have been coming out the way they have. and it's not just trump's non-plurality victory. the democrats, you know, have won -- hold less than 20 of the governor's seats right now. something's going on out there. the reality is the policy of the last two administrations has been to not do very much about chinese mercantilism but to provide social programs to compensate these people. and that has not proven enough. my friends on wall street who now will run this administration and will decide ultimately what our trade policy will be, mr. ross and mr. navarro, will be adequately frustrated i'm sure by the goldman sachs crowd. i doubt they've ever spent an afternoon dining outdoors as they have in manhattan as my son

does in reading, pennsylvania, and looked at the prostitution, the boarded up windows, and the opiate abuse, but that's a real part of america we don't see here in the rarefied confines of washington or the wealth of new york and san francisco. but adjustment, labor market adjustments haven't worked in those places. and we have to ask why. we have to ask why. because it is a very mall distributed outcome that is occurring, and my view is this is not healthy, because we could slip into artachy and i'm afraid if some people in the administration had their way, we might, and that wouldn't be a good thing either. in order to discuss this you can't constantly back down totologies and identities and not really address what it is that china actually does to particular markets in this country. failure to do so is problematic. i know you want to respond. >> i am really struck by the

fact at how little faulty trade policies on the part of the united states have been identified as the problem. with the exception of concerns of certain things about china, and yet the debate -- pardon? [ inaudible ] >> no, no, what i'm saying is, the trump dialogue or line is, faulty trade policies on the part of the united states, and by that they mean tariff liberalization agreements. you're actually on the opposite side saying smart countries do more trade agreements. and no one here other than talking a little bit about china, has said there's this whole decades long failure of u.s. trade policy. but let caroline and rob respond to your comments. >> i just want to say, i'm really concerned about blaming trade for the labor adjustment problems in the united states. so it is true trade played a

small part. so even if you take the study, which actually doesn't look at it general equilibrium. it only looks at the affect of china directly on manufacturing. they find it's 17% of the total lost jobs since 2000. so more than 80% of the manufacturing jobs lost were for other reasons. and the reason i'm concerned about this is because it's so easy to blame the foreigner and not take any blame on ourselves and our own policies. the future of work is different. we have developed machines that do things differently. there are not jobs for the high school dropout or just high school educated who wants to go directly to a factory and is unskilled. even in the manufacturing we do. look at the factories. there are people wearing these very protective suits because everything has to be done in a clean environment and they have

to have some education to run the new types of machines. it is a different environment out there. and we have to recognize this. but i'm really concerned about the xenophobic it's all trade. because it's so easy to blame foreigners and it's not our own fault. and saying that adjustment, that the u.s. has done so much adjustment and that's why people aren't in the labor force is absolutely insane. europe does way more than what we do. that's why people don't object to trade in the way they do here. but we need to do adjustment for everything because otherwise trade and out sourcing take the brunt of the blame when, really, it's just the future of work is changing. and we have to address this. i absolutely agree, we have to address that people are sitting on their couches and taking drugs. but partly they're taking drugs

because they did back breaking work for many years. we got rid of those jobs. that's a good thing. that is a good thing. >> i'll give rob a comment then i'd like to go to q's and a's from the audience. from the audience. >> right. much of what i was going to say caroline has said. but i want to make one other point. when peter says well, if you have a phenomenon, a bilateral trade deficit that cost someone their job, shouldn't you do something about that. well, of course you should with labor policies. but that also fundamentally ignores the other side of it. which is to say that trade deficit represents the ability for american businesses and individuals to consume those goods at less cost. than if they were manufactured here. and that allows them then to buy

more things. made by americans or made by foreigners. which drives growth. this is, you know, to ignore all of the benefits of comparative advantage driven trade. is really -- provides i think a very partial and somewhat distorted picture. >> okay, thank you. i do want to go to questions and answers. so raise your hand. we've got mike roaming around. and when you ask the question, please identify yourself and your affiliation and ask a question, please. >> i'm going to add, if folks could also not speechify with your question and ask a question to the panel, we'd appreciate that. >> okay. >> thank you, manchester trade.

i can't remember what copy machine i'm supposed to associate with peter, i think it was xerox but i'm not sure. but we loved watching you when we thought you were the most successful trade person when we saw you on television actually saying something that people listened to. good seeing you again. my question actually is a very simple question. this is way over my head so i'm learning. the question is, i always thought that the reason we were able to run trade deficits were because we printed money. and the chinese have now gotten wind of this, so they keep talking about displacing the dollar and using the dollar more. can you explain the relationship between our ability to print the money and whether we abuse it or whether it's good or bad and in relationship to the discussion of the causes of the trade deficit. thank you again for a very educational 40 minutes. >> who would like to take on that? >> let's keep the answer short

so we can get more. >> very briefly. other central banks, central banks that don't have a reserve currency, most fundamentally don't back up their money with gold anymore. they back it up by holding u.s. currency and u.s. bonds. for the purposes of international financial dealings, bonds are as good as dollars. so as long as -- this will always require us to have a small trade deficit. we sort of provide the liquidity behind the growing money supplies that grow with the economies around the world. we'll always by printing -- as long as we are the predominate world currency, somebody like venezuela that's maybe not a great example, given the way life is in venezuela. say mexico will hold dollars at their central bank to back up the peso. there is some relationship there. does that answer your question, steve? >> not at all.

>> i tried. you see, the economists are most correct when they're least understood. >> steve wanted to be told how he could print money. that's what he was really asking. another question. >> let me just say one thing and this may clarify it in part. the reason it works is the united states remains the largest and most productive economy in the world. and consequently -- and produces the highest returns of any advanced economy. and consequently you accept dollars because you have confidence that you can invest them and get a sound return from them in the united states. >> okay. got a number of hands up, please. okay. >> mine's actually pretty quick.

bill lane, right now i'm not affiliated. the two extremes on trade from the u.s. perspective. one is nafta and the 18 countries where we have free trade agreements. if you look at 2015 you put the numbers together, trade's in balance, slight trade surplus, you add in services. all in all, half exports going to 400 million people in those countries. and that's by any measure a pretty good return. peter makes a great point on china. it's half of our trade deficit. it's going to be in the news next week. no country in the last century has invested more in infrastructure and education than china has. in fact, if there is a trade war, the first casualties from a u.s. perspective could easily be agriculture and universities because of the number of chinese students studying in the united states. what can we learn from what

china has done right over the last 20 years? as we prepare for the visit next week. >> i would just say infrastructure and education. so these are two things that we have clearly not done well. you can see it as you drive anywhere in the country or at any airport you arrive into. and infrastructure, obviously, promotes growth. it makes trade within the country much easier. and education. going back to the person who gets out of high school and needs a job, we need to train them in a way that there's a job that's waiting for them. and i think that the investment, especially in those two categories, infrastructure and education, is what we're missing. and what china and other countries around the world are doing. >> yeah, as the educator here, or former educator, i taught my

last class in march. i am now emeritus. well, i'm at the tender age of 68 i started teaching in 1970. i thought it would be a nice time to pass the baton. i don't think any academic campaigned harder for nafta than i did. i wrote about it while i was at the university at maine. i lived here while i taught there. peter met me that way. every weekend i would leave maine on a wednesday and go give a speech someplace. return to washington on the weekend to see my family, then go back to maine. those speaking gigs provided the airfares for me to have that commuter marriage. no one really campaigned harder. one of my basic schticks was, this was going to cause the major kinds of problems ross perot talked about. it really will. american education needs a good boot in the behind and parents will be screaming at schools to

finally do better. i mean, a high school education in new york state today and even when i was a boy, was not like the high school education my father got. and we really needed this. the reality is, we send more than half of our children to college now and colleges aren't doing their jobs. one study shows something like 40% of graduates can't do critical thinking. a lot of the college graduates working in starbucks are kind of operating at their full skill level. they look good, smile, sound educated. how educated they really are? i don't really know. i'm starting to doubt it. they certainly aren't prepared to live in a world where hold your breath guys, if you live 20 more years, i hope to be 88. some day. the dentist filling your cavity may well be a robot. that is indeed, really possible. in that environment, the kinds of work that's going to be

available and the countries that are successful, is going to be very high skilled and the countries that are going to be successful have a population of working age people between 25-70 who can run those robots as opposed to, you know, serve coffee. and i don't know that we're doing what we need to do to be a really successful society. i don't know that we are going to be the most productive economy when we meet again in 20 years. the chinese may very well be. because they understand something that we have lost sight of. there is no substitute for being competitive. as an individual, as a company, and as a country. and thinking that the solutions to problems to spend, you know, 60% of your budget on social welfare programs to ameliorate the effects of being displaced. to go around the country and say you have a jobs problem, it's no fault of your own and the government is going to solve it. the real problem is a

maldistribution of income and things of this nature. it is a terrible mistake. >> we need to get moving on. my dentist is kind of a robot. anyway. i hope he's not here. questions? >> real quick from georgetown center for business and public policy. you all agree that trade deficits aren't the key matter. why is it then, what does the administration hope to gain by making as we learned yesterday in stuart vaughan's letter to "the hill," the draft, they leaked a draft, what the focus is going to be on the trade deficit, the goods deficit with mexico? the nafta negotiations, that's the first item of approach, that's the most important item and then they go on to other things. what do they hope to gain by that? >> headlines. political advantage. particularly among the

president's core supporters. the fact, you know, the -- it discussion has shown, is the wrong focus. it will not help any of the people who -- in old industrial towns and those towns who have lost their jobs. but this is a piece of political capital. and it allows the administration to talk about something other than than what the press wants the administration to talk about right now. >> dorothy? >> hi, dorothy from microsoft, thanks very much for your comments. everybody's in violent agreement that a good trade policy has to also be partnered with a very robust broader economic agenda.

we're part of the services industry, the data on services isn't as good as it should be. but we also know that the u.s. runs a surplus in services around the world, so a lot of countries are saying, hm, i have a deficit in services. what should i do about it? there's a little bit of a demonstration effect that i think is kind of lost on the trade deficit debate. i'm just wondering if the speakers might want to comment on that. because, i mean, i don't know that companies can do more than they're doing as we are on redefining the workforce and we've been pretty out spoken on training and s.t.e.m. and all those things. it needs a good trade policy because we're a global country, we're all around the world. >> that is a great question and something i had in my initial comments and i thought -- and i left out by mistake.

services are an area where the u.s. has a trade surplus. it's an area where we're extremely competitive. like manufacturers where traded goods tend to have higher productivity and pay higher wages and all that, our traded services are exactly the same. in fact, they're even better than the traded manufacturers. it's the companies like microsoft, et cetera. so services, you know, it's been the hope for a long time, i remember back in 2000 the first time i wrote a paper on the current account deficit when we were concerned about it then, services was the miracle that was going to save us because that would continue growing and offset the manufacturers deficit. it hasn't quite happened yet. i think it could happen. this is precisely why we need trade agreements. we need countries to open their service sectors to the extraordinarily competitive u.s. services exports. so that was actually where the biggest gains from tpp would

have come from the transpacific partnership is services. so i think it's understudied because the data isn't as good. actually, we don't even know how much data is crossing and how much it's valued at because so many services are free. even when you buy manufacturers now, a lot of what you're buying is services because there's this data flow and maintenance and things like that, contracts, that come with it. so services is an incredibly important part. and these jobs are just as important, if not more for the future of this country than manufacturing jobs. >> just to follow up quickly on what caroline just said. the way in which trade statistics are conducted, if an automobile comes in from germany the entire value of the automobile is counted as a manufactured good. what the world bank -- not the

world bank -- the wto and oecd -- wto did, tthe world ban some, too. they looked at trade and broken it down by value added. as caroline was saying, an automobile or airplane that comes in has services built into it. whether it's computer related services whatever, this is a multieconomy cross country study and they said if you look at the value added of trade whereas currently the way it's done through customs, said that about 23%, 24% of world trade was services, when you do the value added approach, it turns out that something like 48% of world trade are services. are there other questions, though? some way in the back and then the middle here. >> hi, doug palmer with politico. i came in a little late so i

don't know if you talked about the new executive order trump is signing today where he is basically going to direct ustr and the commerce department to examine all the significant bilateral trade deficits to determine what their causes are. then i guess that's going to provide him the ammunition he needs to go after the bilateral trade deficits, using whatever remedy tools are at his disposal. i wondered, could you comment generally on that idea? do you think it's -- that's an effective approach to trade policy by trying to examine the root causes of the bilateral trade deficits with all these countries? just more generally, what do you think are the odds that the trump administration is going to have as significant -- make a significant impact on the overall trade deficit?

>> okay. >> i don't think that economics provides you -- would you like to -- >> go ahead. >> economics alone provides an answer to this at all. first of all, i've only read the "wall street journal" account of it. i haven't seen the draft. but as i read the account, it said that they would study our trade agreements and, you know, to the extent that they have been adequately enforced. and then the particular trade barriers of individual countries. that sounds to me an awful lot like the annual report of the u.s. trade representative's office. so i think -- peter doesn't have much staff. they have them over in the eisenhower building. i understand if they run out of space there, they're moving him to pueblo, colorado. which reflects why this is happening. not to be cute. but there as you know there's a tug of war in this administration between the national economic council on the one hand and ross and navarro on the other as to which way to go on trade.

. almost sounds like booting it a bit. and that's what i think is going on here. is that they're booting the issue. now, whether they will have an impact comes down to really discussions with china. mr. trump doesn't seem to quite understand you can't come to town and make everybody your enemy. belittle rand paul and expect him to help you on healthcare and jump on the conservative and they don't vote for you and expect them to help you with taxes. the same goes with dealing with foreign governments. who hasn't he insulted? but the one place he can have an effect is where you have two big -- that's true. that's coming. they're making it increasingly hard he's even said to be nice with them. the only place he can have an impact is in some kind of bilateral where he has a lot of leverage. and that would either be with mexico or with china. with mexico i don't think that's going to happen because of the structure of the automobile supply chain. it's that simple.

with china that may well be the same as well. my feeling is the only way he's going to have an impact is in a bilateral discussion. there's a political will on the other side to avoid big trouble and the whole thing blowing up and that could be the chinese. i don't see him changing the whole world on the basis of being angry with the whole world. it's like me trying to take on the whole economics profession. it doesn't work very well but i don't have to be president of the united states to get results. >> rob? >> peter is exactly right about one thing and that is ustr does this every year. not only that, every administration when it comes in does it again. and sometimes you find examples which u.s. negotiators can take to other countries and receive

concession in some negotiation on the basis of particular behavior that's been uncovered. none of it has any effect on the trade deficit. again. it can affect the distribution of the trade deficit, but not its size. and the one thing we know about this particular administration, is that if it gets its way, the u.s. trade deficit will rise sharply. the reason we know that is because if it gets its way u.s. savings will fall substantially because the u.s. budget deficit will rise substantially. >> caroline did you want to say something? >> that was how i started my comments in bilaterals really don't matter and that these -- right now the fiscal deficit is what we need to worry about for the trade deficit. so the trade deficit isn't about trade policy.

i want to say this again. it's much more about fiscal policy. or other policies to do with savings and investment. i want to make one comment about china that we talk about this bilateral with china. but because of supply chains, our trade with china isn't just china, it's factory asia. some of the trade deficit with china is because just like we have factory north america and europe has factory europe, they have factory asia. so parts and components go to china, get assembled, come to us. because trade is measured in gross, not in value-added terms we end up with a really big deficit with china. it's actually quite a bit more complicated than that. >> one of the things about your question, what struck me is the fact that in the -- at least the drafts that have been circulated on what's going to be studied on these trade deficits, it really missed a whole bunch of factors that were being discussed here.

it was all about different aspects of trade policy and the broader issues which have a bigger impact wasn't even in their list of things to look at. one question i have, is this going to be a real from the bottom-up look at trade deficits and understand them in the sense it was discussed here, or is it really just kind of a hit list of favorite topics. other questions? one here. one there, one there. maybe what we'll do is maybe ask the questions and then we'll have the panelists have one last shot at them. okay. i think three questions one there, don philips and i thought there was one other there. right there, yeah. jean francois. >> barbara buoy whitman. my doctoral dissertation was entitled "the impact of u.s. fiscal policy on the composition of our exports" and it was written 30 years ago.

i've also stood up to our current president when he was a candidate and said to his face, we do not have the worst trade negotiators in the world, sir. he looked startled and turned to the next person. the most important part i heard this morning is one i wish were better understood. that is, what is really changing is the whole nature of supply chains. if you build buildings or pipelines and you say all the components have to be american that's an easy policy to articulate, whether it's a good one or not. if we have changed the nature of where production is, and where the parts are made and how they're traveling around the world, how do you incorporate any understanding of that into any policy articulation so the public begins to understand it? >> okay. don? and jean francois?

>> don philips. there is an argument that these big trade imbalances are driven by a number of key countries, namely china and germany. 7 more or less rigging their economies or structuring them so that they restrain consumption, therefore they have a big capital surplus that has to go anywhere and goes into the u.s. and that drives the big trade deficit. i wonder if you have any comments on that. >> this last question here. >> thank you, jean francois. cepii, french international economic think tank. i would like to come back to the example that peter evoked repeatedly about the 21 years old or 25 years ode on his couch, protected by obamacare and having food stamps and watching espn and -- i mean i have empathy for that guy.

but i absolutely don't see how trade policy is going to affect him. i can see lots of internal economic policy decisions by the u.s. government that could help him. but i don't see what trade policy has to do with that guy. >> okay, thank you. if we can quickly each of you respond to any or all, whichever of those questions you'd like to respond to. >> i'd like to start with the first, because i completely agree. i think supply chains and trade are so important and we've seen that with the nafta debate. and companies coming out and saying, wait, wait, wait, if we lose mexico we're just not going to be able to compete in the global economy. i think the way to explain it to the public are these pictures i've seen of products and little arrows showing where all the components are coming from. it's kind of like, the picture

you might see of ivanka trump showing where all her jewelry and clothes are from and how much they cost except this is an picture of an actual product showing the parts and components we need to make that product. so you cut off the wiring harness in a car which comes pretty much exclusively from mexico. there is going to be $200 or whatever more your car is going to cost. and we need all these parts and components. i think, you know, it's really at the companies who make these products need to come out and develop pictures like that. >> okay. >> to answer to respond to the second question. countries are free to organize themselves in ways that meet the

goals that they want to achieve. and if a society decides that what they're going to have is less consumption, and more export driven growth, through regulation, and the society accepts that, that's their right. i don't have any problem with that. we're defining a different kind of society. one with open markets and an open economy. and driven by innovation instead. and that's what we're comfortable with. it may -- but finally, again, however china organizes itself or however before that korea organized itself, had a very highly organized strategy that was export driven. it really -- china learned an

enormous amount from korea. however they organized themselves, it will not affect our trade deficit. our overall trade deficit. we keep on saying this. but we keep on going past it. it may affect the distribution of it. but it doesn't affect the size. and i'm perfectly satisfied with much more satisfied with the american model. and american values. for how to organize the economy than to try to quote unquote compete with china, a country with per capita income a tenth of ours in order to change a figure in a bilateral trade deficit. >> thank you.

>> let me add one thing to what robert said, which has been forgotten in the whole discussion. when we talk about china. china brought 500 million people out of poverty over the last 20 years through their policies, and that's something really to be celebrated in the world. they were living you know, under $2 a day. that's not the case anymore. >> i would surely celebrate that if we hadn't driven millions of americans into poverty in redding, pennsylvania to look the way it does right now. but regard to how changing the trade deficit would affect that those workers that are not working -- [ inaudible ] >> trade policy. okay. if maneuvering trade policy in such a way to persuade the chinese to be less protectionist so we had less of a bilateral trade deficit with china, we'd have more people working. in turn, that would reduce our fiscal deficit, not increase it.

depending on how we did it. i want to be very clear of this. i'm not in favor of shutting down trade with klein. i'm in favor of finding a way to leverage them that would make them less protectionist, where we could sell them more stuff. that would in turn put more people to work. there would be fewer people on food stamps. there would be fewer people on medicaid. last i did the math, that reduces our fiscal deficit, that reduces our savings deficit, it doesn't increase it. my feelings is that policies y china affect our trade deficit, and the reverse. that's how trade policy would affect that. one of the things that's gone on throughout this discussion and certainly the administration has not helped it either either with its choice of people to do its speaking or with the rhetoric of

the principal, is that the policy has been seen in the most draconian terms, we're going to shut down china with china, throw out this huge tariff, and it is not going to be for purposes of getting a better deal. if we manage to get a better deal with a country that's so large and so significant in our deficit, we will have -- it will reduce our savings deficit and i would suggest that both economies longer term will grow. >> i want to thank you the audience. >> woo will we will be addressing issue in the supply chain. we hope you all come to that

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